Stainless Steel Production: The East vs. West Point of Contention

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MetalMiner welcomes guest contributor Badri Narayanan, a lead analyst at Beroe Inc., who specializes in tracking various steel markets and related alloys. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight. This is the first part of Narayanan’s series on stainless steel pricing systems “Stainless Steel Surcharge System—An Inconvenient Reality.”

Stainless steel pricing follows a unique mechanism, unlike most other industrial steel alloys. The alloy which is primarily used in making utensils, equipment and pipelines, is highly influenced by the volatility in its raw material, mainly nickel, prices.

In order to mitigate the volatility and protect their operating margins, stainless steel mills in the US and Europe follow an “alloy surcharge” based pricing system. This system ensures that the risk of price volatility is shared equally by both the stainless steel mills and consumers.

Under this surcharge based system, stainless steel price comprises two components, i.e. a base price and an alloy surcharge. The base price remains constant over long periods and is reflective of the operational cost excluding the raw material cost. The constituents of base price include fixed costs, minor consumables, labor and energy costs and other production costs such as a rolling charge. Typically the base price constitutes 30-45% of the total stainless steel price.

The alloy surcharge reflects the raw material cost and it is calculated on a monthly basis, based on the raw material average price over the previous month using various raw material indices. For example, the alloy surcharge for the month of January 2014 will be based on the average raw material price between the third week of November 2013 and third week of December 2013.

This system of following a month’s lag in calculating the price was adapted in September 2011 in the US, replacing a previous system in which a two month lag period was followed. This shift was aimed at curbing speculative buying and adding a more accurate reflection on the raw material price fluctuations.

Point of Contention

The surcharge based pricing system followed predominantly in Europe and the US has been under contentious debate over its adverse effect on a consumer’s business operations. The volatility in nickel price gets transferred into the stainless steel price through the surcharge, leading to price fluctuations on a monthly basis. Producers of industrial equipment and other such users of stainless steel are adversely impacted by such fluctuations. These producers find it difficult to pass on the price fluctuation to their end use consumers – i.e. users of stainless steel equipment, utensils, pipes etc.– thus impacting their business margins. This results in price fluctuation across the value chain, beginning from the stainless steel mills and ending at the end-user’s business.

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